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In the early 1980s, new legislation allowed banks to pay interest on checking deposits, which they could not do previously. a. If we define money to include checking deposits, what effect did this legislation have on money demand? Explain. b. If the Federal Reserve had maintained a constant money supply in the face of this change, what would have happened to the interest rate? What would have happened to aggregate demand and aggregate output? c. If the Federal Reserve had maintained a constant market interest rate (the interest rate on nonmonetary assets) in the face of this change, what change in the money supply would have been necessary? What would have happened to aggregate demand and aggregate output?

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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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Chapter
Section
BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 21, Problem 6PA
Textbook Problem
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In the early 1980s, new legislation allowed banks to pay interest on checking deposits, which they could not do previously.

a. If we define money to include checking deposits, what effect did this legislation have on money demand? Explain.

b. If the Federal Reserve had maintained a constant money supply in the face of this change, what would have happened to the interest rate? What would have happened to aggregate demand and aggregate output?

c. If the Federal Reserve had maintained a constant market interest rate (the interest rate on nonmonetary assets) in the face of this change, what change in the money supply would have been necessary? What would have happened to aggregate demand and aggregate output?

Subpart (a):

To determine
Demand and supply model resulting from a new legislation.

Explanation of Solution

The new legislation allowing banks to pay interest on checking depo...

Subpart (b):

To determine
Demand and supply model resulting from a new legislation.

Subpart (c):

To determine
Demand and supply model resulting from a new legislation.

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